The shadowy and secretive world of NZ credit scoring

Rob Stock is a Stuff business reporter specialising in money and consumer affairs issues.

ANALYSIS: In July I met a woman newly out of an abusive relationship.

That meeting started me on a frustrated, and disappointing, journey to understand how the credit scores of zero to 1000 assigned to each of us actually worked.

After the relationship was over, a loan company pursued her for the whole of a car loan her former partner had used to buy a car.

Charity Good Shepherd managed to persuade Aotea Finance to split the loan, and only chase her for half of it, but it wrecked her credit score.

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Banks, including Bank of New Zealand forgive some loans incurred by domestic abuse victims, but are reticent to talk openly about it, fearing a raft of false claims.

Before the abusive relationship, the woman had been good with money, but now had a credit score in the low 200s.

Credit Simple, owned by credit reporting company Illion, says your credit score shows how credit-worthy you are, and a good score is more than 500.

Those with good scores get better offers from banks, telcos, insurance companies and power companies. A bad score can make it harder to get a rental, and sometimes even a job.

And yet this woman’s score reflected not her ability with money, but her past abusive relationship. It would take several years of good payments behaviour to repair her score.

One bank told me that when it forgave loans to domestic violence victims, it also helped them clean up their credit reports.

For each escapee from an abusive relationship who gets that help, how many don’t? It was the first of many questions I have yet to get an answer to.

The credit reporting system is a vast, financial surveillance system.

When we sign up to a bank, insurer, get a loan, or open a power account we “consent” to them passing information to the three credit reporting companies: Illion, Equifax, and locally-owned Centrix.

They compile credit reports on each of us, and calculate credit scores.

The system helps commerce, we are told. It lets lenders decide who to lend to, and at what cost. It helps power companies decides who has to pay in advance for their power.

In the United States, academics have accused the credit scoring system of being racist, as well as entrenching poverty, and privilege.

That’s because, like the abuse survivor I met, people with lower credit scores find life harder, and more costly.

In New Zealand, studies of the sector appear not to have been done, including whether the system is biased, and whether it’s being used for legitimate purposes.

One senior property manager told me after two decades in the business, he felt the scores had no predictive value for whether tenants would pay their rent on time.

A credit score, and credit information, is only worthwhile, if it has predictive value.

After meeting the abused woman, I got a second credit score shock when I applied for a $15,000 loan with Latitude for a story fact-checking the lender’s advertising that it offered loans “from 8.99%”.

I had a credit score of 984 out of 1000 on my Credit Simple credit report, and yet I was offered a loan at 20.99%.

Latitude said there had been a mistake in information passed to it by Equifax.

Equifax gave me a credit score of 832.

I had two more questions: How can I have two scores out of 1000 that are so different, and how often are people being offered credit that’s too expensive because of errors?

I checked my score at Centrix. It was 866.

What accounts for the differences?

Centrix chief executive Keith McLaughlin, said some of the variation was because not all the credit reporting companies have the same information.

“We’ve got a lot more comprehensive data in our systems than the others have,” McLaughlin said.

“It enables us to be far more precise, and far more accurate.”

Could that mean the cost of a loan could in part be based on the lenders’ choice of credit reporting bureau? How would that be fair?

If my three credit scores do reflect my creditworthiness accurately, then my three scores of 832, 985 and 866 should all represent the same risk of me defaulting on a loan.

I can’t tell you if they do, because while the three credit reporting companies give analytical reports to their customers (such as banks, electricity companies), they do not share them with the public.

I asked for help understanding the scores, but overseas-owned Illion and Equifax refused my requests, which brought this reaction from McLaughlin: “I am quite surprised, because credit scores are quite important in life.”

Centrix was more open. Its credit scores represent the risk of someone defaulting on payments in the next 12 months, if the past 12 months patterns repeat.

If a lender gives loans to five people with a score of 559, it can expect one of the loans to have missed payments.

A score of 192 means the lender can expect just 0.17 good accounts, for each bad one. A score of 781 means it should get 27 good accounts for every one bad.

My Equifax credit report contained a “relative risk” score of 19.32. Its call centre didn’t know what that meant.

Eventually, I got a short email from an Equifax public relations person saying: “A relative risk of 2.5 means that the applicant is 2.5 times better than the population average.”

So, I’m 19.2 times less likely to default on an account than the average person?

Complicating all of this is that the likes of banks, and property managers get to decide how to use the scores.

After several frustrating weeks, I have a growing list of questions about the accuracy and fairness of aspects of the credit reporting system.

It’s working for people like me, mostly, it seems, but is it letting others down, and entrenching inequity?